Investors eye banking stock to sail through NSE bear run
With the current bear run at the NSE 20 share expected to go on till 2020, focus now turns to which stocks to invest in, with market analysts tipping the banking, insurance and manufacturing counters.
These sectors, analysts say, have strong company fundamentals which have led to improvement to their bottom lines.
Nairobi Securities Exchange (NSE) chief executive Geoffrey Odundo said the market is undervalued, presenting a good opportunity for people to invest in stocks that are currently discounted.
According to Ghengis Capital analyst Gerald Muriuki, institutional investors are divesting from a risky asset – equity – and buying gold and bonds to protect their investments from the risk of the global recession.
Muriuki expects more activities on the banking and manufacturing sectors because of strong fundamentals and the fact that they have consistently registered high returns.
This is a position Victor Koech, an analyst with AIB Capital agrees with, stating that the market undervaluation started in 2016 when the Central Bank of Kenya introduced the interest rate cap law, which saw most banks stop lending leading to low economic activity.
Other factors, Koech says, include a devastating drought which caused inflation, leading to an increase in food prices with people consuming only the basic. Credit went further down in the real estate as people stopped constructing houses.
The underperformance has seen local institutional investors look for better returns elsewhere.
He says whereas pension funds, through their managers, have turned towards the fixed income assets (bond and security papers), their foreign counterparts have been investing in the US to take advantage of the rise in the Federal funds rate – interest rate at which depository institutions in the US lend reserve balances to other depository institutions overnight on an uncollateralised basis – which has been hiked four times in 2018.
“The hike in the Fed rate has really hurt emerging markets. Foreign investors have given emerging markets a wide berth, for fear of devaluing their currency. This is because fund managers, especially in the US, are judged by returns on the dollars invested,” he says.
In its weekly market report, Cytonn Investments says in August, the equities market was on a downward trend, with NASI, NSE 20 and NSE 25 declining by 0.5, 6.1 and 1.7 per cent respectively, taking their year to date performance to gains and losses of 5.1, 12.9 and 0.8 per cent respectively.
There are 12 segments at the NSE 20 share index. They include agriculture, automobile, banking, commercial and allied, construction and allied energy and petroleum, insurance, investment, manufacturing and allied; telecommunication and technology, real estate and investment trust segments. Koech reckons that banking, insurance and manufacturing stocks are ideal to invest in at the moment.
“Banks, for instance, play a crucial part in this economy because most firms need funding,” he says adding that with increased lending, listed banks are now making profits and issuing dividends.
This is unlike the period 2016 and 2017 when the economy was down, incomes had shrunk and companies were not making profits, and therefore, not borrowing money from banks.
While speaking to CNBC Africa last week, Caleb Mugendi, Cytonn Investments assistant manager – public markets said most of the insurance companies are from a position of very poor or negative performance, where the whole market shrunk 18 per cent.
“They have come from a lower base. This has improved this year in addition to the fact the loss ratio for most of them has come down, giving them a bigger space for their revenue underwriting margins,” said Mugambi, adding that the position has improved this year, as most have had to re-align their portfolios in terms of income and equity securities.
Insurance companies invest premium from their customers to the equity market. As is expected, whenever there is bear run in the equity market it hurts their fair gains.
Most tier-one banks have reported healthy profits in their half-year results, in the event announcing good dividends for their shareholders.
Cytonn Investment notes that during the month of August all listed banks in Kenya recorded an increase in core earnings per share of 9.1 per cent, down from 19 per cent recorded in a similar period 2018.
According to Koech, companies trading on the manufacturing segment are also worth investing in, because of their strong fundamentals, citing their dominance in their respective local markets, strong selling points to their consumers, the fact that they have a regional exposure and are able to differentiate themselves to their competitors.
However, all is not gloomy for the NSE 20 Share index. Koech predicts the markets will rebound in 2020, riding on the back of the lowering of the Fed funds rate, which he says was reduced once in 2019 with expectations high of another reduction in 2020.
He also predicts an end to the US and China trade tiff in November this year to further spur global economic growth, which has been growing by three per cent, with the growth synchronised between emerging and developed countries.
“The growth has been supported by increased trade and an accommodative monetary policy in 2018 which enabled credit to flow into the markets, with a corresponding decline in unemployment and growth in incomes,” he says.
The bear run has seen a number of share prices fall due to a mix of corporate governance weaknesses, indebtedness and a tough economy. This has seen five stocks trading at below Sh1 and 17 firms fall below Sh5 per unit, with other stocks being delisted.
It has been elicited by the global recession in the advanced economy, affecting local and foreign participation in the market and leading to a decline in the prices.